Implications of reducing subsidies
Nurul Amin | Sunday, 6 July 2008
EVEN well before the present upsurge in the oil price when it was substantially lower, the costs of subsidies to be borne by the government in financial year 2007-08 from buying oil at international prices and then marketing it within the country at much reduced price, was projected to be some 75.68 billion Takas. This was a huge sum of money and an amount higher would have to be paid in the current fiscal year, if the subsidies were decided to be maintained at the previous rate. But the government decided not to allow the swelling of the subsidies for fuel oils any further. Thus, the prices of fuel oils were revised substantially upwards last week.
But readjustment of domestic fuel oil prices on the upper side, would also give a stimulus to cost-push inflation when inflation is already running high at well over the double digits. Thus, the overall inflation rate will get only worse when it remains high. The poor will suffer from further erosion of their purchasing power and the consequent decline in their standard of living. The rate of individual and national savings will decline impacting negatively on investment operations and economic growth.
No less worrisome would be loss of competitiveness of various industries, both domestic as well as export-oriented ones, from the cost-push inflation. Loss of competitiveness could lead to notable shrinking of industrial activities and consequent loss of jobs and earnings.
A special committee which was set up earlier to advise the government on the matter very traditionally recommended readjustment or increases in the administered domestic prices of fuel oil in phases. The country witnessed a phase in the implementation of the recommendations last week. But the upward readjustment of fuel oil prices can compound problems for the economy in every way giving rise to more troubles than what would be sought through reduction of subsidies.
In certain conditions, subsidies are a far better evil than straightforward measures to cut them down. The projected liabilities to be borne on account of keeping unchanged the rate of fuel oil subsidy in the current year's budget would not be more than 5.6 per cent of the Gross Domestic Product (GDP). This amount is not too high and should have been considered as bearable. Especially, not paying this amount of subsidy can invite on the economy a far greater havoc than what gains are expected from cutting subsidies.
While maintaining the previous rate of subsidies, all-out efforts would have to be made to make unnecessary the import of fuel oils. A good short-term measure would be rapidly helping the switch over to CNG from fuel oil by the country's transportation sector. The import of CNG conversion kits and cylinders was duty-free. This facility led to CNG conversion of 123,573 vehicles until November 2007 which helped the saving of some 34 billion Takas from declining import of petroleum products, especially octane and petrol. A far greater amount of saving can be achieved from speeding up CNG conversion. The government should, at least, target to convert all its vehicles to CNG mode by 2009. The CNG conversion enterprises in the private sector can be made to do their work with greater enthusiasm if the government substantially reduces the various taxes on them. Such fiscal incentives will enable the conversion companies to carry out their conversion works at less cost. This, in turn would encourage more transport owners to convert their engines to CNG at the soonest.
In other areas of the economy, the development and use of non-conventional sources of energy such as solar power, must be encouraged. The use of coal and natural gas should be similarly promoted. Exploration and production activities of gas should be taken up urgently to increase the availability of gas. These measures should cut dependence on imported fuel oils in the medium and longer terms.
But readjustment of domestic fuel oil prices on the upper side, would also give a stimulus to cost-push inflation when inflation is already running high at well over the double digits. Thus, the overall inflation rate will get only worse when it remains high. The poor will suffer from further erosion of their purchasing power and the consequent decline in their standard of living. The rate of individual and national savings will decline impacting negatively on investment operations and economic growth.
No less worrisome would be loss of competitiveness of various industries, both domestic as well as export-oriented ones, from the cost-push inflation. Loss of competitiveness could lead to notable shrinking of industrial activities and consequent loss of jobs and earnings.
A special committee which was set up earlier to advise the government on the matter very traditionally recommended readjustment or increases in the administered domestic prices of fuel oil in phases. The country witnessed a phase in the implementation of the recommendations last week. But the upward readjustment of fuel oil prices can compound problems for the economy in every way giving rise to more troubles than what would be sought through reduction of subsidies.
In certain conditions, subsidies are a far better evil than straightforward measures to cut them down. The projected liabilities to be borne on account of keeping unchanged the rate of fuel oil subsidy in the current year's budget would not be more than 5.6 per cent of the Gross Domestic Product (GDP). This amount is not too high and should have been considered as bearable. Especially, not paying this amount of subsidy can invite on the economy a far greater havoc than what gains are expected from cutting subsidies.
While maintaining the previous rate of subsidies, all-out efforts would have to be made to make unnecessary the import of fuel oils. A good short-term measure would be rapidly helping the switch over to CNG from fuel oil by the country's transportation sector. The import of CNG conversion kits and cylinders was duty-free. This facility led to CNG conversion of 123,573 vehicles until November 2007 which helped the saving of some 34 billion Takas from declining import of petroleum products, especially octane and petrol. A far greater amount of saving can be achieved from speeding up CNG conversion. The government should, at least, target to convert all its vehicles to CNG mode by 2009. The CNG conversion enterprises in the private sector can be made to do their work with greater enthusiasm if the government substantially reduces the various taxes on them. Such fiscal incentives will enable the conversion companies to carry out their conversion works at less cost. This, in turn would encourage more transport owners to convert their engines to CNG at the soonest.
In other areas of the economy, the development and use of non-conventional sources of energy such as solar power, must be encouraged. The use of coal and natural gas should be similarly promoted. Exploration and production activities of gas should be taken up urgently to increase the availability of gas. These measures should cut dependence on imported fuel oils in the medium and longer terms.